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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE

SECURITIES EXCHANGE ACT OF 1934 FOR THE

QUARTERLY PERIOD ENDED AUGUST 1, 2009

Commission file number: 0-50659

GANDER MOUNTAIN COMPANY

(Exact name of Registrant as Specified in its Charter)

180 East Fifth Street, Suite 1300
Saint Paul, Minnesota 55101
(651) 325-4300

(Address, including zip code, and telephone number, including area code,

of Registrant’s Principal Executive Offices)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date:  Common Stock, $.01 par value; 24,197,733 shares outstanding as of September 8, 2009.

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GANDER MOUNTAIN COMPANY

QUARTERLY PERIOD ENDED AUGUST 1, 2009

Index

Our logos Gander Mountain®, Gander Mtn.®, Gander Mountain Guide Series®, We Live Outdoors®, Overton’s®, Gladiator,® and Dockmate;® and other trademarks, tradenames and service marks of Gander Mountain mentioned in this report are our property. This report also contains trademarks and service marks belonging to other entities.

SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q contains forward-looking statements regarding us, our business prospects and our results of operations that are subject to certain risks and uncertainties posed by many factors and events that could cause our actual business, prospects and results of operations to differ materially from those that may be anticipated by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those described in Item 1A—“Risk Factors” of our Annual Report on Form 10-K for fiscal year 2008. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Commission that advise interested parties of the risks and factors that may affect our business.

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PART I.  FINANCIAL INFORMATION

ITEM 1.     UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Gander Mountain Company

Consolidated Statements of Operations - Unaudited

(In thousands, except per share data)

See accompanying notes to unaudited consolidated financial statements.

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Gander Mountain Company

Consolidated Balance Sheets

(In thousands)

See accompanying notes to unaudited consolidated financial statements.

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Gander Mountain Company

Consolidated Statements of Cash Flows - Unaudited

(In thousands)

See accompanying notes to unaudited consolidated financial statements.

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Gander Mountain Company

Notes to Unaudited Consolidated Financial Statements

Note 1. Basis of Presentation

The accompanying unaudited financial statements of Gander Mountain Company (“the Company”) have been prepared in accordance with the requirements for Form 10-Q and do not include all the disclosures normally required in annual financial statements prepared in accordance with U.S. generally accepted accounting principles. The interim financial information as of August 1, 2009 and for the 13 and 26 weeks ended August 1, 2009 and August 2, 2008, respectively, is unaudited and has been prepared on the same basis as the audited annual financial statements. In the opinion of management, this unaudited information includes all adjustments necessary for a fair presentation of the interim financial information. All of these adjustments are of a normal recurring nature. These interim financial statements filed on this Form 10-Q and the discussions contained herein should be read in conjunction with the annual financial statements and notes included in the Annual Report on Form 10-K for the fiscal year ended January 31, 2009, as filed with the Securities and Exchange Commission, which includes audited financial statements for our three fiscal years ended January 31, 2009.

In preparing the accompanying financial statements, we have evaluated subsequent events through September 15, 2009, the issuance date of this Quarterly Report on Form 10-Q. We have determined that no events or transactions have occurred subsequent to August 1, 2009 which require recognition or disclosure in the financial statements.

The Company’s business is seasonal in nature and interim results may not be indicative of results for a full year. Historically, the Company has realized more of its sales in the latter half of the fiscal year, which includes the hunting and holiday seasons. The Company’s business is also impacted by the timing of new store openings. Both variation in seasonality and new store openings impact the analysis of the results of operations and financial condition for comparable periods.

With the acquisition of Overton’s Holding Company (“Overton’s”) in December 2007, the Company’s consolidated reporting includes its two reportable segments: Retail and Direct. The Retail segment sells its outdoor lifestyle products and services through retail stores. The Direct segment is the internet and catalog operations under the Company’s Overton’s brand name as well as the internet and catalog operations under its Gander Mountain brand, which launched August 3, 2008.

The following table shows the Company’s consolidated sales by product category for the comparable 13 week periods:

(1)          Direct segment sales from Overton’s for the second quarters of fiscal 2009 and fiscal 2008 have been included in the Fishing and Marine category. Direct segment sales from Gander Mountain Direct are included in their respective categories.

Supplemental Cash Flow Information - During the 26 weeks ended August 1, 2009 and August 2, 2008, the Company acquired equipment totaling $1.3 million and $2.9 million, respectively, which was financed through capital leases. Purchases of property and equipment in the statement of cash flows exclude these amounts.

Fair Value of Financial Instruments  -  The carrying amounts of the Company’s financial instruments, primarily debt instruments, approximate fair value at August 1, 2009 and January 31, 2009.

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Note 2. Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued FASB No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162 (“SFAS 168”). SFAS 168 establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with GAAP in the United States. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009.

In May 2009, the FASB issued FASB No. 165, Subsequent Events (“SFAS 165”), which establishes general standards of accounting and disclosure for events that occur after the balance sheet date but before financial statements are issued. The accounting guidance contained in SFAS 165 is consistent with the auditing literature widely used for accounting and disclosure of subsequent events, however, SFAS 165 requires an entity to disclose the date through which subsequent events have been evaluated. SFAS 165 was effective for interim and annual periods ending after June 15, 2009. The adoption of SFAS 165 did not have a material impact on our consolidated financial statements.

In April 2009, the Financial Accounting Standards Board (“FASB”) issued three FASB Staff Positions:

1) FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,

2) FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, and

3) FSP No. FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments.

All three FSPs were effective for the Company’s second fiscal quarter ending August 1, 2009. The adoption did not have a material impact on the Company’s financial statements as the guidance was relevant to financial assets such as debt or equity securities and derivative instruments, which the Company does not hold.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133. SFAS No. 161 is intended to improve financial standards for derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand the effect these instruments and activities have on an entity’s financial position, financial performance and cash flows. Entities are required to provide enhanced disclosures about: how and why an entity uses derivative instruments; how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations; and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of SFAS No. 161 in the first quarter of fiscal 2009 had no impact on the Company’s results of operations, cash flows, or financial position.

Note 3. Credit Facility

The Company maintains a $345 million revolving credit facility and a $20 million Term Loan A with Bank of America, N.A., both of which have a maturity date of June 30, 2012. The actual availability under the credit facility is limited to specific advance rates on eligible inventory and accounts receivable. Typically, availability will be highest in the latter half of the fiscal year as inventory levels and advance rates increase. Interest on the outstanding indebtedness under the revolving portion of the credit facility currently accrues at the lender’s prime commercial lending rate, or, if the Company elects, at the one, two, three or six month LIBOR plus 1.25% to 1.75%, depending on the Company’s EBITDA, as defined in the credit agreement. The Company’s obligations under the credit facility are secured by interests in substantially all of its assets. The revolving credit facility and Term Loan A outstanding balances are reported together as “Borrowings under credit facility” in our consolidated balance sheets.

Availability under our credit facility was $39.8 million and $30.5 million as of August 1, 2009 and August 2, 2008, respectively.

Current financial covenants under the credit facility require that availability under the line of credit not fall below 7.5% of the lower of the borrowing base, as defined, or the credit facility limit. This availability test is applied and measured on a daily basis. The covenants also limit the Company’s annual capital expenditures. The credit facility also contains other covenants that, among other matters, restrict the Company’s ability to incur substantial other indebtedness, create certain liens, engage in certain mergers and

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acquisitions, sell certain assets, enter into certain capital leases or make junior payments, including cash dividends. The Company was in compliance with all covenants as of August 1, 2009 and January 31, 2009.

Note 4. Long Term Debt

The Company’s long term debt consists of the following (in thousands):

Term Loan B—The Company secured a $40 million term loan with a final maturity date of September 30, 2011, in connection with the acquisition of Overton’s. As of August 1, 2009, the required principal payments remaining under Term Loan B are reflected below (in thousands):

Short Term Notes Payable—Related Parties.  In June 2009, the Company extended the maturity date on its $10 million term loan with its two major shareholders to September 30, 2009. The lenders under the agreement are Gratco LLC, an affiliate of David Pratt, the Company’s chairman and interim chief executive officer, and Holiday Companies, an affiliate of Ronald A. Erickson, the Company’s vice chairman, and Gerald A. Erickson, a director of the Company.

Capitalized Lease Obligations.  The Company leases certain technology equipment and leasehold improvements under leases that have been accounted for as capital leases. During the 26 weeks ended August 1, 2009 and August 2, 2008, the Company leased equipment accounted for as capital leases in the amounts of $1.3 million and $2.9 million, respectively. The leases vary from one to three years in term and require monthly payments of principal and interest.

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Note 5. Goodwill and Intangible Assets

The Company accounts for goodwill according to the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. The reported goodwill and intangible assets, (net of amortization where appropriate), as of August 1, 2009 and the changes in these accounts since the fiscal year end are as follows (in thousands):

In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, goodwill is not subject to amortization. Both Goodwill and other Intangible Assets are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset may be impaired. When tested, the fair value of the Company’s goodwill and intangible assets are estimated and compared to their carrying value.

The Company performed its annual assessment in the fourth quarter of fiscal 2008.  The Company does not believe that any indicators of impairment that would require reassessment have occurred since the last assessment was performed.  Circumstances affecting impairment testing and the results of such testing may change in future accounting periods.  Among the factors that could materially impact the results of our future impairment assessments are the actual sales and operating cash flows from our retail and direct segments during our higher volume third and fourth fiscal quarters of fiscal 2009, as well as the use of different assumptions, estimates or judgments in the testing process, including selection of an appropriate discount rate applicable to estimated future operating cash flows, and estimates of gross margin, selling, general and administrative expenses and capital expenditures.

Note 6. Stock-Based Compensation

The Company has three share-based compensation plans: the 2004 Omnibus Stock Plan, the 2002 Stock Option Plan and the Employee Stock Purchase Plan. In addition, the Company granted certain stock option awards in fiscal 1998 and fiscal 2002 that were not under a stock-based compensation plan (“non-plan” awards). However, as of August 1, 2009, there were no “non-plan” option awards outstanding. The Company is not authorized to grant any awards under the 2002 Stock Option Plan. The Company’s board of directors has suspended the Employee Stock Purchase Plan, effective January 1, 2009. The suspension will continue until it is lifted by future action of the board.

As of August 1, 2009, there were a total of 1,900,717 options to purchase common stock outstanding under all of our stock option plans, with a weighted average exercise price of $10.33 and a weighted average remaining life of 6.1 years.  There were 1,524,202 options that were exercisable as of August 1, 2009 with a weighted-average exercise price of $11.10.

Stock-based compensation expense for the 13 weeks ended August 1, 2009 and August 2, 2008, was $139,000 and $322,000,  respectively.  Stock-based compensation expense for the 26 weeks ended August 1, 2009 and August 2, 2008, was $275,000 and $703,000, respectively. As of August 1, 2009, there was approximately $800,000 of unrecognized compensation expense related to stock options that is expected to be recognized over a weighted-average period of 1.9 years.

As of August 1, 2009, there were 2,049,445 shares available for future grant under the 2004 Omnibus Stock Plan.

Stock option activity for the periods presented is as follows:

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Note 7. Selected Balance Sheet Information (in thousands)

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Note 8. Exit Costs and Related Charges

The Company presents this caption in the consolidated statement of operations to aggregate various charges related to exiting certain stores, impaired assets or other charges for assets no longer used, as well as severance charges. The Company believes it is more meaningful to present these expenses on a separate line in the consolidated statement of operations. Exit costs and related charges for each of the 13 and 26 week periods ended August 1, 2009 and August 2, 2008  are detailed in the table below (in thousands):

The Company’s reserve for exit costs and related charges as of August 1, 2009 and January 31, 2009, was $203,000 and $210,000, respectively.

Note 9. Income Taxes

The Company’s effective income tax rate was (3.1) % and (3.5) % for the second quarter of fiscal 2009 and second quarter of fiscal 2008, respectively. The change in the effective tax rate between periods is primarily the result of the change in pretax losses compared to the change in state income taxes and deferred tax liabilities related to differences in the book-tax basis of certain acquired intangible assets.

The Company’s tax provision primarily represents minimum or net worth taxes due in various states. Some states have adopted an adjusted gross receipts tax. The Company has no provision for Federal income tax for either period presented due to

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accumulated operating losses. The Company determined that realization of the tax benefit related to the net deferred tax assets was uncertain. Accordingly, a valuation allowance is recorded for the entire balance of the net current and non-current deferred tax assets.

Note 10. Earnings Per Share

Basic and diluted loss applicable to common shareholders per share is based upon the weighted average number of shares outstanding. All potentially dilutive stock options and convertible securities to purchase shares of the Company’s common stock have been excluded from the calculation of weighted average shares outstanding for all years presented because their inclusion would have an anti-dilutive effect on loss per share. These shares of common stock subject to potential issuance as a result of these securities totaled 1,900,717 and 3,282,815 as of August 1, 2009 and August 2, 2008, respectively.

Note 11. Contingencies

Legal Proceedings - Various claims, lawsuits or other proceedings arising in the normal course of business may be pending against the Company from time to time. The subject matter of these proceedings typically relate to commercial disputes, employment issues, product liability and other matters. As of the date of this report, the Company is not a party to any legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on its financial condition or results of operations.

Note 12. Segment Reporting

For the Retail segment, operating expenses primarily consist of distribution center expenses associated with moving product from the Company’s distribution center to its retail stores, occupancy costs of the retail stores, store labor, advertising, depreciation, and all other store operating expenses, as well as all expenses associated with the functional support areas such as executive, merchandising/buying, human resources, information technology, and finance/accounting.

For the Direct segment, operating expenses primarily consist of catalog expenses, e-commerce advertising expenses, and order fulfillment expenses, as well as all expenses associated with the functional support areas of the Direct segment such as merchandising/buying, information technology, and finance/accounting.

Segment assets and liabilities are those assets and liabilities directly used in the operating segment. For the Retail segment, assets primarily include inventory in the retail stores, fixtures, and leasehold improvements. For the Direct segment, assets primarily include inventory, goodwill and intangible assets, deferred catalog costs and fixed assets.

Results by business segment are presented in the following table (in thousands):

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Gander Mountain Company operates the nation’s largest retail network of stores specializing in hunting, fishing, camping, marine and outdoor lifestyle products and services. We have expanded our store base to 119 conveniently located Gander Mountain outdoor lifestyle stores (including three outlet centers), providing approximately 6.6 million square feet of retail space in 23 states. We opened our newest store in March 2009, which we anticipate will be our only new store in fiscal 2009 as we focus on growing our direct marketing business and continuing to improve the profitability of our retail operations. The sales of outdoor lifestyle products and services through our 119 retail stores constitutes our Retail segment.

On December 6, 2007 we acquired Overton’s, Inc., a leading internet and catalog marketing company targeting recreational boaters and water sports enthusiasts. Overton’s product line is extensive, ranging from water skis, wakeboards and apparel to electronics, boat covers, boat seats and other marine accessories. Overton’s products are sold under two principal brands, Overton’s and Consumers Marine, through a multi-channel approach that includes catalogs, websites (www.Overtons.com and www.Consumersmarine.com) and two retail showrooms. We acquired Overton’s for its established position in the marine accessories business but also to provide us a platform from which to develop and grow the internet and catalog retail channels for the Gander Mountain product categories.

In August 2008, we launched a new internet and catalog operation under our Gander Mountain brand offering an initial assortment of the products available in our retail stores. We intend to expand our product assortment and continue to grow this component of our direct business as we seek to build market share in an internet and catalog market. Together, the Overton’s business and our catalog and internet offerings under the Gander Mountain brand comprise our Direct segment.

Our long-term strategic objectives are to:

·                  Continue to develop a multi-channel offering to our customers by growing our Gander Mountain and Overton’s Direct marketing business through expanded product offerings, additional catalogs and enhanced customer service;

·                  Grow retail store revenues and build upon the Gander Mountain brand by executing strategies centered upon increasing customer traffic, focusing on well-defined customer segments and deploying targeted, value-added merchandising and marketing tactics;

·                  Offer our customers the best combination of a broad assortment of products and services, convenience and value in the outdoor lifestyle sector, including new products that meet the needs of our customer segments; and

·                  Continue to improve our profitability by leveraging our increasing scale to improve margins and by controlling expenses.

Quarterly Results of Operations and Seasonality

Our quarterly operating results may fluctuate significantly because of several factors, including the timing of new store openings and related expenses, profitability of new stores, weather conditions and general economic conditions. Our business is also subject to seasonal fluctuation, with the highest sales activity in our Retail segment normally occurring during the third and fourth quarters of our fiscal year, which are primarily associated with the fall hunting seasons and the holiday season. In recent years, the second half of our fiscal years have generated approximately 57% to 63% of our annual sales. In addition, our customers’ demand for our products and therefore our sales can be significantly impacted by unseasonable weather conditions that affect outdoor activities and the demand for related apparel and equipment. Our grand opening activities surrounding our new store openings can also cause fluctuations in sales when compared to operating periods in later months. It is for this reason we include a new store in our comparable store sales base in its fifteenth full month to minimize the effect of grand opening activities.

Seasonality also impacts inventory levels for our retail stores which tend to rise beginning approximately in April, reach a peak in November, and decline to lower levels after the December holiday season.

The Overton’s business is also subject to seasonal fluctuations, with its highest sales activity normally occurring during the first and second quarters of our fiscal year, which is the primary season for boating, marine and watersports related products. Historically, Overton’s has generated approximately 65% to 70% of its sales during the first half of our fiscal year and approximately

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50% during the second quarter of our fiscal year. We expect the Gander Mountain Direct segment business to have similar seasonality as our retail stores as the product offerings are similar.

Our pre-opening expenses have and will continue to vary significantly from quarter to quarter, primarily due to the timing of store openings. We typically incur most pre-opening expenses for a new store during the three months preceding, and the month of, its opening. In addition, our labor and operating costs for a newly opened store can be greater during the first one to two months of operation than what can be expected after that time, both in aggregate dollars and as a percentage of sales. Accordingly, the volume and timing of new store openings in any quarter has had, and is expected to continue to have, a significant impact on quarterly pre-opening costs and store labor and operating expenses. Due to these factors, results for any particular quarter may not be indicative of results to be expected for any other quarter or for a full fiscal year.

RESULTS OF OPERATIONS

The following table presents, for the periods indicated, selected items in the consolidated statements of operations as a percentage of our sales:

In the second quarter of fiscal 2009, the Retail segment represented 85% of our consolidated sales and produced a net loss of $9.1 million, while the Direct segment represented approximately 15% of our consolidated sales and reported net income of $1.7 million. The Direct segment results include operating losses due to the start-up nature of the Gander Mountain Direct business.

The following table indicates the average percentage of consolidated sales represented by each of our major product categories during the second quarters of fiscal 2009 and 2008:

(1)        Direct segment sales from Overton’s for the second quarters of fiscal 2009 and fiscal 2008 have been included in the Fishing and Marine category.  Direct segment sales from Gander Direct are included in their respective categories.

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Financial Review - 13 Weeks Ended August 1, 2009 Compared to 13 Weeks Ended August 2, 2008

Sales.  Consolidated sales decreased by $4.5 million, or 1.8%, to $248.4 million in the second quarter of fiscal 2009 from $252.9 million in the second quarter of fiscal 2008.

Retail segment sales were $210.8 million for the second quarter of fiscal 2009, a decrease of $2.3 million, or 1.1% from $213.1 million for the second quarter of fiscal 2008. The Retail segment sales decrease resulted from a comparable store sales decrease of $4.8 million partially offset by $1.8 million in sales from new stores not included in the comparable store sales base, and a $0.7 million sales increase from changes in other revenue.  We did not open any new stores in the second quarter of fiscal 2009.   During the second quarter of fiscal 2008, we opened two new stores.

Direct segment sales declined $2.2 million, or 5.4%, in the second quarter of fiscal 2009 as compared to the second quarter of fiscal 2008 due to consumer spending in the boating accessory business being curtailed by the economic environment as well as decreased catalog spending. The Direct segment sales decrease includes sales of the Gander Mountain Direct website and catalog business which was not present in the second quarter of fiscal 2008.

Our Retail comparable store sales decreased 2.4% for the second quarter of fiscal 2009, as compared to a comparable store sales decline of 11.7% for the second quarter of fiscal 2008. Excluding a negative 4.2% impact of power boat and ATV sales and power sport services which are categories the Company has substantially exited, comparable store sales were a positive 1.8% for the second quarter of fiscal 2009. This increase was attributable to sales increases in the firearms, ammunition, firearm accessories, marine and camping categories and was also attributable to, we believe, increased advertising expenditures in the second quarter of fiscal 2009.

Overall, the Retail sales mix for the second quarter of fiscal 2009 was relatively consistent with the second quarter of fiscal 2008. The notable exceptions were: (i) the firearms, ammunition and accessories category, which increased its share of the Retail sales mix by 395 basis points on strong market demand, and (ii) lower sales in the powersports category resulting in a 509 basis points lower share of the sales mix as we exited the powerboat and ATV categories.

Gross Profit.  Consolidated gross profit decreased by $3.1 million, or 4.6%, to $64.4 million in the second quarter of fiscal 2009 from $67.5 million in the second quarter of fiscal 2008. As a percentage of sales, consolidated gross profit decreased 77 basis points to 25.9% in the second quarter of fiscal 2009 from 26.7% in the second quarter of fiscal 2008. The significant factors affecting our gross profit rate during the second quarter of fiscal 2009 were a lower Retail gross profit rate that impacted the consolidated rate by 16 basis points as well as a decline in the Direct segment gross profit rate that impacted the consolidated rate by 61 basis points.

Retail segment initial margins increased 108 basis points, benefitting from higher initial margin rates in firearms, ammunition, firearm accessories, fishing and marine, but were partially offset by lower margin rates in powersports and apparel-footwear. The increase in Retail segment initial margins were more than offset by sales de-leverage in occupancy costs and distribution costs as a result of negative comparable store sales. Direct segment gross profit declined due to promotional start-up efforts related to our Gander Mountain brand direct business as well as promotional efforts related to a difficult sales environment for the Overton’s brand.

Selling, General and Administrative Expenses.  Consolidated SG&A expenses increased by $1.5 million, or 2.3%, to $68.5 million in the second quarter of fiscal 2009 from $66.9 million in the second quarter of fiscal 2008. As a percentage of sales, consolidated SG&A expenses increased 110 basis points to 27.6 % in the second quarter of fiscal 2009 from 26.5% in the second quarter of fiscal 2008. Retail SG&A as a percentage of consolidated sales increased 153 basis points primarily due to increased advertising expense in the Retail segment. The Direct segment SG&A improved 43 basis points as a percentage of consolidated sales due to decreased catalog expenses in the Direct segment.

Exit Costs and Related Charges.  We continued to incur minimal costs in fiscal 2009 which are primarily related to the exit of the powersports categories. These costs in the second quarter of fiscal 2008 were primarily related to costs associated with store closings.

Pre-opening Expenses.  As we opened no stores in the second quarter of fiscal 2009, we incurred no pre-opening costs. During the second quarter of fiscal 2008, we incurred pre-opening costs of $0.4 million related to new store openings in May of 2008.

Interest Expense, Net.  Interest expense decreased by $1.9 million, or 42.1%, to $2.6 million in the second quarter of fiscal 2009 from $4.5 million in the second quarter of fiscal 2008.

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Average outstanding borrowings during the second quarter of fiscal 2009 decreased approximately $25 million, or 7.3%, as compared to the second quarter of fiscal 2008, due to improved cash flows from operations during the latter part of fiscal year 2008 and reduced capital expenditures. Average interest rates on our outstanding borrowings were 200 basis points lower during the second quarter of fiscal 2009 than in the second quarter of fiscal 2008, due to general interest rate declines. The average effective interest rate on the average of all outstanding borrowings during the second quarter of fiscal 2009 was 3.31%.

Income Tax Provision.  Our tax provisions for the second quarters of fiscal 2009 and fiscal 2008 primarily represent minimum or net worth taxes due in various states. Certain states have adopted an adjusted gross receipts tax. We have no provision for Federal income tax in the second quarter of fiscal 2009 or fiscal 2008 due to the uncertainty of the realization of our net operating loss carryforwards. We have determined the realization of the tax benefit related to our net deferred tax asset is uncertain at this time and a valuation allowance was recorded for the entire balance of our net deferred tax asset.

Net Loss.  Our net loss was $7.3 million for the second quarter of fiscal 2009, as compared to net loss of $4.9 million for the second quarter of fiscal 2008, due to the factors discussed above. The net loss for the second quarter of fiscal 2009 includes losses of approximately $3 million associated with the powersports categories which we substantially exited, including sales discounts, inventory markdowns and other operating costs. The net loss for the second quarter of fiscal 2008 includes income of approximately $350,000 associated with these powersports categories.

Financial Review – 26  Weeks Ended August 1, 2009 Compared to 26 Weeks Ended August 2, 2008

Sales.  Consolidated sales increased by $15.5 million, or 3.4 %, to $476.1 million in the first half of fiscal 2009 from $460.5 million in the first half of fiscal 2008.

Retail segment sales were $420.7 million for the first half of fiscal 2009, an increase of $19.6 million, or 4.9% from $401.1 million for the first half of fiscal 2008. The Retail segment sales increase resulted from sales of $15.0 million from new stores not included in the comparable store sales base, a comparable store sales increase of $8.5 million and a $3.9 million sales decrease from stores closed during the first half of fiscal 2009 but open in fiscal 2008, as well as changes in other revenue.  We opened one new store in the first half of fiscal 2009. During the first half of fiscal 2008, we opened five new stores and closed three stores. On a net basis for the first half of fiscal 2009, we added 57,000 square feet of retail selling space as compared to 308,000 square feet added in the first half of fiscal 2008.

Direct segment sales declined $4.0 million, or 6.8%, in the first half of fiscal 2009 as compared to the first half of fiscal 2008 as consumer spending in the boating accessory business was curtailed by the overall economic environment, including credit conditions, housing market foreclosures, rising unemployment and decreased consumer confidence, and their effects on discretionary spending. A reduction in catalog spending also contributed to lower sales levels. The Direct segment sales decrease includes an increase from the sales of the Gander Mountain website and catalog business which was not present in the first half of fiscal 2008.

Our Retail comparable store sales increased 2.2% for the first half of fiscal 2009, as compared to a comparable store sales decline of 9.4% for the first half of fiscal 2008.  Excluding a negative 4.8% impact of power boat and ATV sales and power sport services which are categories the Company has substantially exited, comparable store sales were a positive 7.0 % for the first half of fiscal 2009. The increase was attributable to sales increases in the firearms, ammunition, firearm accessories, fishing, marine and camping categories and was also attributable to, we believe, increased advertising expenditures in fiscal 2009 as compared to fiscal 2008.

Gross Profit.  Consolidated gross profit increased by $1.8 million, or 1.6%, to $111.3 million in the first half of fiscal 2009 from $109.5 million in the first half of fiscal 2008. As a percentage of sales, consolidated gross profit decreased 41 basis points to 23.4% in the first half of fiscal 2009 from 23.8% in the first half of fiscal 2008. The significant components of our gross profit rate during the first half of fiscal 2009 were an increased Retail segment gross profit rate that impacted the consolidated rate by 39 basis points, offset by a decline in the Direct segment gross profit rate that negatively impacted the consolidated rate by 80 basis points.

Retail segment initial margins increased 86 basis points as a result of higher initial margin rates in firearms, ammunition, firearm accessories, fishing and marine and which were partially offset by lower margin rates in powersports and apparel-footwear. Retail initial margin increases were partially offset by sales de-leverage in occupancy costs.

Direct segment gross profit declined due to promotional start-up efforts related to our Gander Mountain brand direct business as well as promotional efforts related to a difficult sales environment for the Overton’s brand.

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Selling, General and Administrative Expenses.  Consolidated SG&A expenses increased by $4.7 million, or 3.7%, to $130.6 million in the first half of fiscal 2009 from $125.9 million in the first half of fiscal 2008. As a percentage of sales, consolidated SG&A expenses increased 10 basis points to 27.4 % in the first half of fiscal 2009 from 27.3% in the first half of fiscal 2008. Retail SG&A as a percentage of consolidated sales increased 55 basis points due to increased advertising expense in the Retail segment. The Direct segment SG&A improved 45 basis points as a percentage of consolidated sales due to reduced catalog expenses in the Direct segment.

Exit Costs and Related Charges.  We continued to incur minimal costs in fiscal 2009 which are primarily related to the exit of the powersports categories. These costs in the first half of fiscal 2008 were related to costs associated with store closings.

Pre-opening Expenses.  Pre-opening expenses related to new retail stores decreased by $1.7 million to $0.3 million in the first half of fiscal 2009 from $2.0 million in the first half of fiscal 2008. We opened one new store in fiscal 2009 as compared to five new stores in the first half of fiscal 2008.

Interest Expense, Net.  Interest expense decreased by $4.1 million, or 44.1%, to $5.2 million in the first half of fiscal 2009 from $9.4 million in the first half of fiscal 2008.

Average outstanding borrowings during the first half of fiscal 2009 decreased approximately $29 million, or 8.8%, as compared to the first half of fiscal 2008, due to improved cash flows from operations during the latter part of fiscal year 2008 and reduced capital expenditures. Average interest rates on our outstanding borrowings were 217 basis points lower during the first half of fiscal 2009 than in the first half of fiscal 2008, due to general interest rate declines. The average effective interest rate on the average of all outstanding borrowings during the first half of fiscal 2009 was 3.44%.

Income Tax Provision.  Our tax provisions for the first half of fiscal 2009 and fiscal 2008 primarily represent minimum or net worth taxes due in various states. Certain states have adopted an adjusted gross receipts tax. We have no provision for Federal income tax in the first half of fiscal 2009 or fiscal 2008 due to the uncertainty of the realization of our net operating loss carryforwards. We have determined the realization of the tax benefit related to our net deferred tax asset is uncertain at this time and a valuation allowance was recorded for the entire balance of our net deferred tax asset.

Net Loss.  Our net loss was $26.0 million for the first half of fiscal 2009, as compared to net loss of $29.3 million for the first half of fiscal 2008, due to the factors discussed above. The net loss for the first half of fiscal 2009 includes losses of approximately $5.0 million associated with the powersports categories which we substantially exited, including sales discounts, inventory markdowns and other operating costs. The net loss for the first half of fiscal 2008 includes losses of approximately $1.2 million associated with these powersports categories.

LIQUIDITY AND CAPITAL RESOURCES

Our primary capital requirements are for seasonal working capital needs, particularly when inventories are increasing; capital expenditures; and to the extent of the highly seasonal nature of our business, operating losses. During periods of new store growth, property and equipment and pre-opening expenses to support the new stores also require significant capital. Sources of liquidity for providing capital to meet these needs have primarily been borrowings under our credit facility, operating cash flows, and short and long-term debt financings from banks and financial institutions as well as our two major shareholders.

Fiscal 2008 was the first year since we began our large-format store expansion in fiscal 2003 that we substantially slowed our new store growth. We opened one new store during our second quarter of fiscal 2009 and do not expect any additional new store openings during the remainder of the fiscal year. We opened five new stores in fiscal 2008, including three relocations/consolidations of small-format stores. This change in strategy had a positive impact on our cash flows and liquidity in fiscal 2008, as we substantially reduced cash used for new store inventories, leasehold improvements, equipment and pre-opening expenses. This result, coupled with improvements in retail operating results, contributed to a $38 million reduction in total debt for fiscal 2008. These changes continued to impact us positively with respect to our financial position and liquidity, as inventory and debt levels remained lower in the second quarter of fiscal 2009 versus the comparable period last year. The following chart summarizes the principal elements of our cash flow for the comparable first half periods of fiscal 2009 and fiscal 2008 (in thousands), and the number of stores opened during each period.

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Net cash used in operating activities was $42.7 million in the first half of fiscal 2009, compared to net cash used in operating activities of $9.3 million in the first half of fiscal 2008. The overall $33.3 million increase in net cash used by operating activities in the comparable 26 week periods was primarily due to:

·                  an increase in cash used of $23.5 million due to greater inventory increases in the first half of fiscal 2009 as compared to the first half of fiscal 2008. The fiscal 2009 increases reflects merchandising our stores earlier for the upcoming hunting and holiday seasons as well as building firearms inventory levels to meet anticipated demand.

·                  a decrease in cash provided of $12.4 million from decreases in accounts payable and other liabilities primarily attributable to the reductions in floor-plan financed inventory of boats and ATVs, which carried longer payment terms. Powerboats and ATV inventory and accessory receipts during our first half of fiscal 2009 were $19 million lower than during the first half of fiscal 2008 with such purchases having payment terms typically between 90 and 180 days.

·                  a decrease in cash used of $3.3 million as a result of the reduction in the net loss in the first half of fiscal 2009 as compared to the first half of fiscal 2008.

Net cash used in investing activities was $5.4 million in the first half of fiscal 2009 and $12.4 million in the first half of fiscal 2008. Cash invested in the first half of fiscal 2009 and fiscal 2008 each consisted primarily of purchases of property and equipment for stores and for information technology investments. We use cash for leasehold improvements and equipment to open new and relocated stores and to remodel and upgrade existing stores. Purchases of property and equipment also include purchases of information technology systems and expenditures for our distribution facility and our corporate headquarters.

Financing activities provided $48.0 million of cash in the first half of fiscal 2009 and provided $20.8 million of cash in the first half of fiscal 2008. In the comparable periods, the borrowings under our credit facility funded our cash used in operations as well as capital expenditures. Borrowings under the credit facility were partially offset by reductions in long term debt through scheduled payments of $7.2 million in the first half of fiscal 2009 and of $3.4 million in the first half of fiscal 2008. During fiscal 2008, we also borrowed $10.0 million from two major shareholders, due on September 30, 2009, primarily in response to a reduction in advance rates under our revolving credit facility.

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Credit Facility and Term Notes

We have maintained a revolving credit facility with Bank of America, N.A. since 2001. Currently the revolving credit facility is $345 million and offers an option to increase the revolving facility by another $55 million subject to certain terms and conditions. The actual availability under the credit facility is limited to specific advance rates on eligible inventory and accounts receivable. Typically, availability will be highest in the latter half of our fiscal year as inventory levels and advance rates increase. Interest on the outstanding indebtedness under the revolving portion of the credit facility currently accrues at the lender’s prime commercial lending rate, or, if we elect, at the one, two, three or six month LIBOR plus 1.25% to 1.75%, depending on our EBITDA, as defined in the credit agreement. Our obligations under the credit facility are secured by interests in substantially all of our assets. The table below summarizes pertinent information regarding our credit facility with Bank of America, N.A.: